Wednesday, September 24, 2008

Why We're In The Mess We're In

This prophetic news article comes from the September 30, 1999 New York Times (hat tip: Coyote Blog):
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990s by reducing down payment requirements,'' said Franklin Raines, Fannie Mae's chairman and CEO. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s.

"From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''
Just one more example of the insidious effects of government intervention in the free market. And now we all have to pay for it, to the tune of $700 billion.


Barstool69 said...


Is there any incentive to having low income families in homes or condos that they own opposed to renting? I realize that renting is essentially throwing away money because you don't really have anything to show for all the money you spend-so is owning a home a better thing? I guess I'm trying to figure out why there was this big push to get low income families into homes they owned. The bottom line is that even if you want them to get into homes, giving these people a lot of money they shouldn't be able to have is not a good way to encourage smart home buying...

Also, if the government is going to buy all these mortgages, what's the incentive not to just default. It's not like uncle Sam is going to take your home away right?

Patrick said...


Taking your second question first, my understanding is most of these mortgages and mortgage-backed securities are already worthless because they've already been defaulted on. As to whether Uncle Sam would come in and foreclose, I'm not sure how that would work because we've never nationalized our banking system before.

The bigger question, however, is why the big push toward minority/low-income home ownership. The idea of course is that home ownership helps build better communities and reduces crime. This is why Fannie, and later Freddie, were created: to ensure a taxpayer-backed "secondary" mortgage market for loans that banks normally wouldn't give out.

That all sounds great, but everything comes at a cost. There's no free lunch, and resources are limited. And the mistake liberals make when talking about extending credit is to only look at one side of the equation: the borrower. The lender and his concerns and constraints are rarely discussed.

So when we talk about credit extended by quasi-gov't agencies like Fannie or Freddie, what we really mean is credit that would not otherwise be extended by private institutions. Risks that are so risky they have to be backed by taxpayer dollars, because private lenders aren't willing to take them.

Also, the availability of artificially cheap credit induces all kinds of distortions and malinvestments in the economy. Investments in projects take place that initially look profitable but are ultimately not. As a result, these projects have to be liquidated, and layoffs ensue.

It seems that instead of allowing this process properly to run its course, Bernanke & Co. wish to further postpone the day of reckoning by providing more cheap credit. This is no different than treating a drug addiction with more even drugs.

The worst part, of course, is that Democrats are seizing this opportunity to blame the "evils" of free-market capitalism and calling for more of the same gov't regulations and interference that caused this very problem in the first place.

HANK said...

I just got approved for Fannie Mae mortgage with 3% down, and a rate of 5.8% locked for 30 years. And I won't have to pay closing costs if the deal goes through. There's also a $7500 federal tax credit (which is paid back over 15 years.)

The sad thing is, I know I don't deserve it, but I damn will take advantage of the situation, and will sure as hell make those payments.

If everyone was an honest hard working modest Hank, there would be no problem. But, most of the American lower class try to live above their means, and the liberals want to "empower" them to achieve "the American Dream."

Joe said...

Also, answering your first question, renting is often maligned as a poor way to provide a living space for one's self. I enjoy being a renter. First off, it's a hell of a lot cheaper than buying, hands down. Sure, there's cheap loans out there, but you add on escrow, insurance, property tax, repairs, etc, it really starts to add up. I'm comfortable in the fact that I've signed a lease agreement that not only outlines my responsibilities as a tenent, but those of the landlord as well. I enjoy the freedom of being able to move out at the end of the lease term. I disagree with the view that renting is throwing one's money away, but I respect its validity.